A Handy Guide to Logistics Models: from 1PL to 5PL

What is logistics?

Logistics, in a broader sense, means transferring material, inventory, and goods from one place to another, making sure that the supply chain is not broken, both suppliers and customers are happy and the company’s KPIs are accomplished. In a more narrow sense, logistics is a complex net of operations, which govern the whole supply chain - from inventory management, warehouse oversight, storage, goods packaging, transportation, tracking, customs clearance, shipping, and delivery.

A historical remark - XIX-century France’s military commanders called the process of troops and armies movement an art, a “logistique” in French. Modern logistics is truly a kind of art, which helps to maintain business-to-business (B2B) and business-to-consumer (B2C) relations, analyzes all parties’ needs and goals, makes goods’ transferring faster and easier, and improves the whole supply chain process. Most recent global developments have brought such technologies as Big Data and machine learning systems to logistics chain, revolutionizing the way it works.

Logistics models

Logistics models mostly depend on the type of logistics services providers. Today we have 5 basic models:

1PL Logistics

1PL Logistics (or First-Party logistics) is a simplest basic model, which means that the company (either a manufacturer or a retailer) performs all logistics operations itself, taking care of all its stages, from inventory management to shipping.

The company does not work with any outsourced logistics operators, instead, it has to hire in-house personnel to perform all these functions. The company has to employ warehouse managers, drivers, packaging specialists, freight handlers, etc.

The company also has to organize the warehouse. In this case, there are two options. As a first option, the company can use a rough Excel-based inventory management sheet, which can handle 2-3 basic functions. The second option is the implementing of a sophisticated and intelligent cloud-based inventory management system, which can perform dozens of operations per minute, analyze real-time demand and plan stocks replenishment accordingly.

First-Party logistics model is basic and understandable. No hidden risks, no pitfalls.

1PL is not “supernatural’, it is basic and understandable. No hidden risks, no pitfalls. A sole responsibility of the company and its owners. The quality of the logistics process, its steadiness and sustainability depend on the money and efforts the company invests into it.

At the same time, while being simple and easy, the 1PL model is rather time-, money- and effort-consuming. This model requires a high amount of investment into inventory and logistics management, as well as an ever-growing necessity to watch the trends and adjust logistics personnel, technologies, equipment, and channels accordingly.

2PL Logistics

2PL model (or Second-Party logistics) is a more sophisticated “version 2.0” of an original 1PL one. 2PL model means a retailer or a producer hires one or several sub-contractors to perform one or several particular logistics functions.

Let’s have a look at the example to understand how it is functioning:

Example

The small cow breeding farm sells milk to several local groceries. This farm outsources a transport company to deliver its milk. However, the farm still holds the responsibility of the overall logistics functioning and guarantees that the consumers will get their milk and yoghurts on time. This model is being called 2PL logistics model.

In this case, the cow breeding farm may invest money and efforts into, for example, cow care and milk quality improvement, and it does not have to spend costs on drivers’ salaries, or cars repair.

 

The contractors working under the 2PL model are usually trusted experts in their niche fields, and their functions are very clearly stated and specified. The company which hires a sub-contractor is fully responsible for supply chain functioning, planning, and supervision.

3PL Logistics

In 3PL (or Third-Party logistics) model the third type of players appears on the stage.

So, we have a company, a retailer or a producer, which hires several 2PL providers for performing the specific functions, like transportation or inventory management. Hiring another company which serves as an outsourced director of logistics and oversees the roles of 2PLs is called 3PL logistics.

This outsourced company becomes a supervisor and controller of all logistics operations, from packaging to shipping. The retailer or producer delegates the responsibility for logistics functioning to a 3PL provider but maintains his control over the supply chain.

Example

If a cow-breeding farm hires a provider to bottle the milk and to control the work of a transport company and a warehouse keeper, this is called 3PL logistics. This provider has to pack the goods, label them, manage their storage and arrange goods delivery to the groceries. However, the cow-breeding farm still takes all administrative decisions and builds relationship with suppliers and customers.

 

3PL logistics is a popular model being widely used in commercial retail. It has proven its effectiveness and flexibility. 3PL model is highly customizable. This means the scope of services performed by the 3PL intermediary, can vary from simple inventory management and transportation to complex customs operations and freight forwarding. If a retailer or producer decides to scale its business, 3PL can adjust its functions accordingly.

To stay competitive, 3PL providers must have expertise across different industries and offer clients new technologies and instruments. For example, computer cloud-based inventory systems or modern delivery options offered by 3PL operators work well for the whole supply chain.

The main and the most crucial drawback of the 3PL model which is being widely debated on is the sense of responsibility. In other words, if a 3PL provider fails to meet customers’ needs or simply makes a mistake in delivery terms or quality, the retailer (or producer) will be blamed for it, not the 3PL intermediary.

If a customer buys a broken or damaged bottle of milk, it affects the reputation of a cow-breeding farm, not the 3PL operator.

4PL Logistics

With the Fourth-Party logistics (4PL) a retailer or producer outsources the whole scope of logistics, inventory planning services and supply chain administration to an external provider. 4PL provider is an experienced multi-task player who builds a relationship with the suppliers, consumers, sales locations, insurers, customs officers, accountants, etc.

Here are the functions 4PL providers usually perform:

  • inventory planning and warehouse management
  • storage organization and supervision
  • labeling
  • change management
  • transportation and delivery
  • consumer demand analyzing
  • choosing cost-efficient transportation methods
  • implementing IT solutions and technologies
  • consumer demand trends watching
  • consultancy and business planning
  • running suppliers database
  • building supplier relationships
  • insurance services
  • customs clearance etc.

The 4PL provider hires companies to perform transportation and warehouse management functions, organizes and supervises them. The 4PL operator is a supply chain director, who builds and controls the whole process and takes managerial decisions.

The client is no longer in charge of its supply chain, it is the 4PL operator who has to make it work smoothly and efficiently. Of course, a 4PL model requires an extreme level of provider’s professionalism and client’s trust. The relationship between a client and a 4PL provider should be built on trust, partnership, and accuracy, as the client shares very sensitive and confidential data with the provider. In this case, the instrument of NDA (non-disclosure agreements) should be used.

4PL is a more sophisticated model of logistics management, which means a 4PL operator has a very high degree of integration and penetration into a client’s business. A 4PL provider should be chosen very carefully and responsibly.

5PL Logistics

The most recent, costly and the most technologically advanced model is called a Fifth-Party logistics. Under this model, all technological solutions and life-hacks used in modern logistics and inventory management systems are united and consolidated. Today’s 5PL providers can analyze, track and predict consumer demand, manage the whole supply chain, organize warehouses and stocks, outsource logistics operators across multiple sales channels and outlets with a help of modern cloud-based technologies.

5PL is often referred to as a “supply network” rather than a “supply chain manager”. 5PL providers deploy cutting-edge technologies, Big Data, Internet of Things to offer innovative solutions to their clients.

It can be a challenging task to choose the right model for your business. Traditionally the choice of a logistics model greatly depends on the complexity of supply chain, company size, capital, and infrastructure. SMEs often choose a 3PL model, while large companies tend to work with 4PLs or 5PLs. If your company is dealing with an increasingly complex supply chain and struggling to meet customer expectations for faster response, then an innovative 3PL, 4PL, and 5PL may be the best solution for you.

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